Bernanke expected to defend ultra-easy policy

Despite market doubts, Bernanke seen staying the course

WASHINGTON (MarketWatch) — Federal Reserve Board Chairman Ben Bernanke will travel to New York City on Tuesday to tell markets that the central bank is not having any second thoughts about its ultra-easy monetary policy stance, Fed watchers said on the eve of the speech.

Bernanke will likely use his speech to emphasize once again that monetary policy will remain highly accommodative and will stay that way even after the recovery strengthens, said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.

Reuters

U.S. Federal Reserve Chairman Ben Bernanke delivers remarks about a significant shift in the direction of U.S. monetary policy at the Federal Reserve in Washington September 13, 2012.

Bernanke will deliver his speech entitled “The Economic Recovery and Economic Policy” at 12:15 p.m. Eastern to the Economic Club of New York.

“The markets look at the Fed as being on cruise control,” said Jacob Oubina, U.S. economist at RBC Capital Markets LLC, in an interview.

Markets think the Fed will continue its third round of asset purchases, commonly know as QE3, to at least the middle of 2013, Oubina said.

Since September, the Fed has been purchasing $40 billion per month of mortgage-backed securities in an open-ended plan that the central bank said won’t end until there is a substantial improvement in the labor market.

Last week, San Francisco Fed president John Williams said that he saw QE3 lasting “well into the second half of next year.”

Fed watchers generally think the Fed will boost its easing power in December by converting its expiring Operation Twist program into an outright Treasury purchase plan program.

At the moment, the Fed is buying $45 billion of Treasurys per month under this plan, but the purchases are offset by sales of short-term securities.

Bernanke’s comments will be generally supportive of further action, but economists don’t expect him to “front-run” any committee decision.

“He’s obviously going to say the Fed will be as accommodative as possible for the foreseeable future, but he’s not going to provide details on what the extension of Twist will look like,” Oubina said.

The Fed’s next meeting to set monetary policy is set for Dec. 12-13.

Bernanke is also expected to deliver a message to Washington in his remarks, by trying to keep pressure on lawmakers to craft a deal that avoids sending the economy off the fiscal cliff — a term the Fed chairman invented.

Bernanke has repeatedly urged Washington to come up with an agreement to put the deficit on a sustainable path while avoiding too much austerity in the short run.

John Lonski, chief economist at Moody’s Capital Markets Group, said he hoped Bernanke might discuss “the degree to which Fed policy might be used in countering any loss of activity” from a deal to cut the deficit.

Fed watchers said that Bernanke’s audience of Wall Street executives is very much divided about the Fed’s innovative quantitative easing.

“It’s like the presidential race. There are a lot of people who like QE and a lot of people who don’t,” said Robert Brusca, chief economist at FAO Economics.

Some blame the Fed has made it easier for members of Congress and the administration to avoid solving the budget mess by keeping long-term interest rates so low.

But others like Bernanke and are pleased with what the Fed has done.

“If nothing else, they make some money of QE,” Brusca said.

Oubina of RBC Capital said many on Wall Street don’t think the program works.

They note that the stock market has been hammered since the Fed announced QE3 in September and that mortgage rates are also relatively unchanged.

“It is hard to make the case that QE3 is having an impact, even on confidence,” he said.

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